January Barometer: How to Trade the New Year


With the New Year upon us and hopes (and fears) high about the weeks and months to come, it's a good time to take stock of the situation and see how seasonality and sentiment can helps your chances in the market.

According to Jeff Hirsch, editor-in-chief of the Stock Trader's Almanac, there are at least four different strategies to deploy this time of year, starting first with the January Effect.

"It's the tendency of stocks to outperform in January," Hirsch defines the trend in the attached video, "especially small caps."

In fact, this trend has become so widely followed and acknowledged that many traders don't even wait until January anymore to start positioning themselves to capture the bounce.

"What we've seen now is in mid December, small caps begin to take off" compared to large caps, he says, "so we see most of the so-called January Effect take place in the last two weeks of December." And this bounce can sometimes carry right into late February or March.

To take advantage of this shifting timeline, the Almanac team has developed what they call "the only free lunch on Wall Street trade" which cherry picks stocks from a list of companies hitting new 52-week lows. While he admits this strategy is clearly based on the January Effect, he refers to it as a quick trade off of weak stocks that with a nearly 70% accuracy rating, is "very impressive".

And finally, there's the January Barometer, who's predictive prowess is often summed up as follows: "As goes January, so goes the year." It's track record since 1950, Hirsch writes in the Almanac, "has registered only seven major errors for an 88.5% accuracy ratio."

For those who want to get a jump on January - and what it portends for the full year - Hirsch suggests taking a look at the First Five Days strategy, which he considers to be ''an early warning system.''

If you can wait, however, Hirsch says combining all three gauges (Santa Claus, First Five Days, and January Barometer) is a great way to make money as it gives you an even better chance to predict if 2013 will be the fifth year of a greying bull market, or the first year of a surly new bear.

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